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5 Things Twitter Inc Management Wants Investors to Know

By Adam Levy - May 2, 2015 at 9:03AM

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The long-term outlook for this social network is still strong despite recent headwinds.

Twitter (TWTR -0.26%) reported its first quarter earnings results after the market close on Tuesday, and the reception was mixed. While the company beat on earnings, producing $0.07 per share on a non-GAAP basis, it fell well short of expectations and its own guidance for revenue, which came in at $436 million.

The latter was a big surprise for investors after eight straight quarters of at least 97% year-over-year increases in ad revenue. Last quarter, however, ad revenue grew just 74% year-over-year. The company pointed to lower-than-expected revenue from direct-response ad products as the reason for the slowdown.

After the report, CEO Dick Costolo and CFO Anthony Noto spoke with analysts about its direct-response ad units and several other interesting aspects of the business. Here are five things Twitter leadership wants investors to know.

Source: Twitter

Direct-response ads fell short, but Twitter is confident about the long-term

Today, [the changes we made to our direct-response advertisements] results in a lower click-through rate and less revenue for Twitter. However, longer term, we expect the higher ROI that advertisers are getting from these higher quality leads to result in CPEs that more than offset the lower click-through rate we are seeing today." -- CFO Anthony Noto 

Last quarter, Twitter made some changes to the way advertisers purchased ads. Instead of paying per engagement, advertisers were able to choose specific actions they wanted users to take -- like download an app, for example. Advertisers only paid when a user completed that action. Naturally, this increases the price per engagement as Twitter delivers users further down the funnel, and Twitter saw a corresponding increase in CPE of 30%. However, many advertisers balked at the higher prices, unwilling to pay them without proof of ROI.

Twitter expects to have issues converting advertisers to the cost-per-action pricing for the next few quarters, but down the road, it expects advertisers to adopt the new price structure. Note that a company usually does not change its pricing policy unless its customers complain loudly enough, so the cost-per-action pricing is likely due to demand from advertisers. Long-term, that could encourage them to spend more on the platform.

Twitter will now count SMS users in its MAU metric

We are now delivering a more complete experience to users we define as SMS fast followers. These are users who sign up and access Twitter solely via SMS. As we now have specific initiatives in place to grow and monetize this user base, we will begin counting SMS fast followers in our total MAU count going forward. -- Noto

The reported 302 million active users does not currently include "SMS fast followers" -- the company will add them next quarter. For perspective, Twitter had six million SMS fast followers in the first quarter. These users are primarily based in emerging markets, and Twitter has developed means of monetizing them through things like promoted accounts.

The ZipDial acquisition should help the company sign up more SMS fast followers going forward, but management admits that average revenue per user will be significantly lower in this segment. Long-term, management believes these fast followers will eventually convert into high-value users on mobile devices or desktop computers because of the technical savvy inherent in using Twitter solely via SMS.

Internal engagement metrics continue to improve

Our number of searches actually accelerated on year-over-year growth basis in the quarter. Direct messages also accelerated on a year-over-year basis in the quarter. Favorite and retweets had strong growth, and we had growth in tweets per day as well. So those metrics all were generally positive. -- Noto

Twitter stopped reporting its average timeline views per user metric with its most recent earnings report, noting that it does not give a true measurement of user engagement. Additionally, the company is replacing measures that actually reduce the number of timeline views with features like "While You Were Away..."

Still, Mr. Noto was scant on the details of how engaged its users really are. Twitter does not have plans to offer official results on any of the metrics he listed, so investors will remain in the dark as to how engaged users are with the platform.

Periscope is seeing good traction

We have seen tremendous early growth on Periscope. In just the first 10 days alone, more than one million people signed into the app and even more have tuned in to live broadcast through the web. This is possible because broadcasters on Periscope can share their Periscopes to Twitter to reach a larger audience. -- CEO Dick Costolo

One of Twitter's three main objectives, according to Costolo, is to build new applications and services. While Twitter did not exactly build Periscope, it helped bring it to market after acquiring the live-streaming app earlier this year. Periscope reached one million users in 10 days -- impressive considering the fact rival app Meerkat took seven weeks to reach 700,000 users.

More importantly, Periscope offers another means for Twitter to add video content to its platform, which is another focus of management. Twitter sees the opportunity to place more lucrative video advertisements in timelines if users are seeing more native video content.

Twitter will integrate with iOS and OS X

We are also working with Apple to surface great Twitter content and accounts directly in Spotlight Search on iOS and OS X, that also makes it easier and quicker to find great things on Twitter. -- Costolo

Similar to the deal Twitter struck with Google last quarter, Twitter says it is working with Apple to surface tweets in iOS and OS X native search bars. This should help Twitter reach an even wider audience.

When coupled with efforts to provide a better logged-out user experience, the new deals with Google and Apple could provide a boost to user growth. The new logged-out homepage showcases the top content on Twitter in a way that is readily accessible to people who are only first hearing about the service.

While the company has no immediate plans to monetize those logged-out visitors, there is a huge long-term opportunity.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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